Until the recent global financial crisis, elite law firms had been growing in size and number of offices for decades, both in the United States and across the world. Accordingly, the reasons behind law firm growth have fascinated legal scholars as well as social scientists studying the legal profession. Many theories have been formulated and tested by empirical research. Burk and McGowan’s article not only provides an excellent summary of these competing theories, but also proposes two new perspectives, namely, (1) relational capital and internal referral network; and, (2) technological innovation and transaction cost. Both are familiar theories in other research areas but neither had been applied to explain the growth of law firms.
In this essay, Burk and McGowan examine the evolution of large law firms in America from the late nineteenth century to the 2008 economic recession. Until the 1960s, most elite law firms have had a simple “partner-associate” two-tier structure following the Cravath System, which emphasized the long-term training of associates, the “up or out” rule of promotion, and the lockstep system for partners. Lateral hiring of partners were rare. As a result, firm growth was steady, featuring what Galanter and Palay have called law firms’ “internal growth engine.” From the 1970s to the mid-2000s, however, law firm growth entered an “explosive” era – the growth rate of elite firms jumped from 5% per year to 8% or more (p. 11). By the mid-1980s, the number of American law firms with more than a hundred lawyers had increased from a dozen to more than 250. The growth in size was accompanied by the expansion of geographic locations and lateral mobility. By 1988, over a quarter of the 500 largest American law firms had acquired more than half of their partners laterally. The lateral movement of associates had also become more frequent. As a result, the Cravath System was significantly eroded. Meanwhile, the formal structure of large law firms had become more complex – two-tier partnership was more commonly adopted, with an increasing proportion of non-equity partners and a higher leverage (i.e., associate-partner ratio) in most firms.
These empirical facts constitute the main puzzle that most economic and socio-legal theories of law firms seek to explain: Why had elite law firms grown so much in this period of time? Burk and McGowan present five explanations, two of which are their own, including diversification of human capital, promotion-to-partner tournament, reputational bonding, referral network, and cost-based factors. In particular, they argue that neither Gilson and Mnookin’s diversification theory nor Galanter and Palay’s tournament theory is well supported by empirical evidence – what law firms care about most is not human capital or associate training, but getting business and controlling costs. In contrast, the authors suggest that an internal referral network among partners utilizes their relational capital (i.e., personal reputation and connections) to bring in business and then efficiently distribute it across the firm, while technological innovation reduces the costs of communication and coordination within the firm. Consequently, relational capital and technological innovation enable law firms to expand in bigger scopes and scales than ever before. Nevertheless, they also make large law firms more dependent on their rainmaking partners and thus become more brittle – there are always risks that some of those partners would leave and disintegrate the firm, especially given the double-edge effect of technological innovation, particularly legal process outsourcing, in making smaller boutique firms more competitive in large legal projects.
So what is the bottom line? Burk and McGowan disagree with Ribstein’s bold prediction of the “death of Big Law” and predict that elite law firms will remain “big but brittle,” especially after the market shakeout generated by the global economic recession since 2008. Their internal structure will evolve into a four-class structure, with equity partnerships growing more slowly, the number of partnership-track associates shrinking, and the number of non-partner specialists and contract attorneys increasing. In the meantime, lateral mobility will remain a significant force and the segmentation between “super-elite” and “semi-elite” firms will become more pronounced.
Yet the article leaves one important question unanswered: will there be more innovations to law firm growth, or will the elite firms simply go back and forth between the existing business and management models according to changing economic conditions? Most of the trends that the authors identify in this article, such as diversification or technological innovation, have been going on since the 1980s. It seems from their conclusions that elite law firms are trapped in the “iron cage” of organizational isomorphism, that is, a “one-size-fit-all” approach to growth and management. However, if we look beyond the United States, real innovations are happening.
Take China, the case I am most familiar with. From the early 2000s, several leading law firms grew from less than a hundred lawyers to mega-firms with more than five hundred or even a thousand lawyers in a decade. Dacheng, the largest Chinese law firm, already has more than 3,000 lawyers and staff in 35 offices, with satellite offices overseas. In March 2012, King & Wood, another elite Chinese law firm with a thousand lawyers in 15 offices, announced a merger with Mallesons, Stephen and Jacques, a major Australian law firm with 800 lawyers. The new firm, King & Wood Mallesons, is widely expected to become a powerful player in the Asia-Pacific region. Yingke, the fastest growing Chinese law firm in recent years, grew from less than thirty lawyers in 2008 to more than two thousand lawyers in 2012, and it is still setting up new offices across the nation at a fanatic speed.
What explains the stunning growth of these Chinese law firms in the past decade? To my knowledge, none of the five theories that Burk and McGowan discuss in the article could work well here. As theories for explaining the growth of American law firms, they are partial and context-dependent. Arguably, an important reason for law firm growth in China is the booming Chinese economy, which makes a sharp contrast to the current crisis of the advanced economies in the West. But even the Chinese economy cannot fully explain the growth of law firms at such a speed. In fact, as the Chinese law firms get big, they are not satisfied with learning and appropriating the experiences of large Anglo-American firms anymore. Some firms use methods similar to franchising to set up new offices nationwide and even classify their offices into different tiers – each tier has a different relationship with the headquarters in Beijing. In a recent interview I conducted in Shanghai, the managing partner of a fast-growing law office explained the firm’s management strategy in a shocking way: “We do not serve clients. We serve lawyers.” This law firm has a managing partner in each of its offices whose main responsibility is not rainmaking, but providing a good office platform for more lawyers to join the firm and do their businesses individually. In other words, the law firm is organized as a large “shopping mall” in which lawyers rent office spaces at fixed prices but share the firm brand nationally. It is perhaps too early to evaluate the success or failure of those innovations, but as experiments for the future of law firms, they are definitely worth the attention of researchers on the legal profession. As part of the new Globalization, Lawyers, and Emerging Economies (GLEE) project, I hope to have more information to offer on this topic in a year or two.